Thursday, September 29, 2011

Gold is a lot like politics.
Very knowledgeable people have very different views on how good an investment it is. And as the price has run up and the stakes have gotten higher, those views seem to be getting increasingly polarized.
Frankly, I'm skeptical of anyone who claims he knows with some amount of certainty whether it is or it's not.
Still, it remains an intriguing option to keep in my portfolio.
Gold, to me and many other investors, has allure as a hedge. Ideally, it's a place where our cash can continue to grow if the market sours.
But that's where my concern comes in.
As a safe haven, gold at these levels does not strike me as particularly safe.
That's why I'm looking elsewhere before I reconsider putting a dime into the GLD or a miner.
The obvious place to turn first is another precious metal, so that's what this piece's focus will be.

Poor man's gold
A year ago, silver looked mighty reasonable, trailing gold's march upward, despite having actual uses other than jewelry.
Silver has many industrial uses, although one of its largest -- photography -- has been shrinking rapidly with the rise of digital imaging.
Still, it seemed that a precious metal with industrial demand is better than a metal with none.
But silver caught fire last year. It gained 162 percent over just 10 months, trouncing gold.
No longer was it the poor man's gold. It was a bubble waiting to burst, and it did, taking two huge drops since May.
Some say it may have fallen too far. I'm more than willing to wait to find out.

Other pricey metals
Two other precious metal, platinum and palladium, also have industrial demand. Your car's catalytic converter (the device in your exhaust system that converts toxic gases into carbon dioxide and water) has at least one of them inside -- usually platinum.
Demand for these metals only increases as emission standards ramp higher.
Platinum is also used in fuel cells and in the refining of petroleum.
Palladium has even more industrial uses.
Both have ETFs which track their price.
But when you look at how the metals have traded historically, it gives pause.
They are far from stable.
Take a look at this chart for platinum that I pulled from kitco.com:

Notice that price drop from the 2007 peak near $2,200 an ounce to the floor, at $800 at the end of 2008.
By the time platinum (ETF: PPLT) was recovering to serve as a hedge to falling stocks, those stocks were nearing their lows and getting ready for their own march back up.

Here's a palladium price chart:

Notice the parabolic peaks, especially the one in 2000. How'd you like to have been a buyer of palladium (ETF: PALL) then, watching your hedge tank from nearly $1,100 to just over $300?

I don't think either of these metals is really a better option to gold right now.

The chart for gold is much different:

An impressive march upward, with only some moderate pullbacks, the most notable coming during the latter part of 2008.

But that may be what bothers me most about this chart. Each of the other precious metals has endured breathtaking drops after any fast runs upward the way gold has run up over the past couple years.
And it seems to me to be a buyer of gold right now, you have to believe it won't have a drop like that.
When I look at what's happened with silver, platinum and palladium, I just cannot convince myself of that.

That will leave me exploring other possibilities for my portfolio protection for now. If you have an idea, feel free to let me know. Otherwise, I'm still searching.

Wednesday, September 21, 2011

A more experienced investor had a gander at my portfolio and was struck by one thing.
"I notice you have no exposure to the precious metals," he said.
I don't.
In fact, the only time I've even thought about touching a precious metal investment was a short-lived plan to bet against silver after a crazy run this spring. It was short-lived only because silver promptly started to plummet before I funded my brokerage account.
There's a good reason why I have yet to touch silver and gold.
I have no idea how to evaluate how much I should be paying for gold or silver or any other precious metal -- not a clue about how one would go about determining the value of the gold ETFs (GLD, IAU).
Gold doesn't have earnings. It makes no sales. It has no margins.
What's more, gold has no industrial uses like copper, iron, or even silver and platinum, have.
Its price seems primarily driven by fear. There's been no shortage of that over the past few years as the price ran up.
Frankly, that makes me fearful of buying gold.

Not at the party
But still, as an investor, I can't help but feel like I'm missing out on an important opportunity to diversify and protect myself from more economic turmoil by having a little precious metals exposure.
Under most circumstances, I turn to more knowledgeable folks for advice. But on this subject, it seems like there are just as many smart money people calling gold a bubble as there are saying it's still under-priced.

Maybe a miner?
That more informed investor also suggested I look at gold-mining stocks.
This was something a little more up my alley: Companies whose fundamentals I could take a closer look at.
Admittedly, miners like Barrick Gold (ABX), and Yamana Gold (AUY) looked quite reasonably priced based on earnings. And that's after most enjoyed a nice appreciation in price over the past six months or so.
But those earnings are based on the rising prices of gold. If gold were to be a bubble, the miners' profits would burst right along with it.
So, the idea of owning a gold miner offered little consolation.
I also considered a more diversified miner, Freeport-McMoran (FCX), figuring that would be a better hedge. But FCX mines copper as well, and many feel that copper's prices are due a fall.

Only time will tell who's the fool
That's all left me just as skeptical about gold as I was when I started taking a closer look at it. Which makes me think I should avoid it altogether.
If the price continues to rise, I'll miss out, and maybe I'll feel stupid for not taking the risk.
But as I once read, the price of gold is determined only by what the next fool is willing to pay for it.
And I just don't want to be that fool who buys just before a bubble bursts.

Monday, September 12, 2011

A longtime friend who admittedly knows very little about investing approached me the other day about the possibility of putting some money to work.
As we talked, it was becoming apparent that anything less safe than a guaranteed CD was going to be an unnerving proposition.
That can be a recipe for disaster if an investor is not careful.
One of the biggest mistakes investors make is miscalculating how much risk we're really willing to take on.
These are trying times in the market right now. The wild swings present great opportunities, but they are not for the faint of heart.
When people first ask me about dipping into stocks, especially those that carry higher risk-reward, I ask this question: "If you had an investment that dropped 20 percent in one day, or even one week, how badly would you freak out?"
If you envision a manic episode, you're probably not ready to wade too far out into the market, and certainly not on your own.
You can still make money in stocks, but you're probably best off sticking with mutual funds, exchange-traded funds and truly stalwart stocks like Proctor & Gamble and Altria. (So long as you're not averse to investing in cigarettes.)

But even if you think you're a risk-taker, you might not be. Imaginary losses are a whole lot easier to stomach than real ones. And most of us learn out risk tolerance the hard way.
But do we have to lose a good chunk of money to find out? Maybe so, at least definitively.
But fortunately, there are some resources out there to help us form a solid foundation for our decisions and avoiding pitfalls.

Friday, September 2, 2011

A rough month on the market brought some big changes in my portfolio in August.
Let's get right to the snapshot. (Right-click on image to see a bigger version.)

A rundown of the changes
Some bad news out of Dolby's (DLB) most recent conference call shook my confidence in the company's ability to rebound anytime soon. I trimmed my position substantially in response. You can see how much it's down this year in the snapshot.
I put that money and more to use during the recent dips.
I opened positions in fertilizer producer Mosaic as well as National-Oilwell Varco (NOV), which provides oil and gas well-drilling equipment and services.

The dips, combined with a day of free trades over at TradeKing, also gave me the chance to add shares of Kennametal (KMT), Balchem (BCPC), Berkshire Hathaway (BRK.B) and Teradata (TDC), which had fallen to $44 from a high of more than $62 and looked like a steal after yet another good quarter. It's already had a nice bounce off that low.

What's up next
The short-term plan is to keep it simple and buy more of what I already own. I like this portfolio out into the future. I'll be adding based on the market gyrations. I'd like to buy more NOV, and more Boston Beer (SAM), but I'll ultimately focus on what I think looks like the best deal when I finally decide to pull the trigger again.

The Blogger

Reporter by day. Stock portfolio manager by night. I've been at it since just before the 2008 crash. I'm still learning everyday.
This blog is where I share my triumphs and my errors. Feel free to share some of yours.